Using NYSE TICK to Gauge Institutional Participation

We tend to get very high or very low NYSE TICK readings when buy and sell programs cause baskets of stocks to uptick or downtick simultaneously. In today's trade, we've seen a truncated range in TICK, with very few readings above +800 or below -800. That tells us that institutional participants are relatively absent from the market, which is confirmed by the fact that volume has been running less than half the norm for this time of day. Recognizing the relative absence of large traders has been helpful in anticipating a truncated trading range for the first part of the morning.
.

Assessing Risk Appetite for Stocks

Are traders rewarding riskier assets or avoiding them? That is a key sentiment issue that cuts across markets. Within stocks, I like to see how smaller cap stocks are trading relative to larger caps. As a rule, if traders are risk-seeking, they will gravitate to the more volatile, more entrepreneurial smaller cap stocks. If traders are risk averse, they'll seek the safety of the larger caps. As we can see from the equities heat map from the excellent Barchart site, so far today the market has been rewarding smaller caps.

Interestingly, however, I'm showing a bit of *underperformance* of the Russell 2000 Index measured from the market open. Such intraday shifts can be important sentiment tells for stocks overall.
.

Retirement Planning for Traders

Maybe it's youth; maybe it's the result of watching markets on short time frames: Traders can be notoriously non-savvy when it comes to investing and planning for retirement. But making money is only half the equation when it comes to achieving financial security. The other half is what you do with your money.

The old wisdom is not always so wise. Buy and hold for the stock market has produced negative returns over the past decade. During the financial crisis, we saw money market funds break the buck and AAA-rated securities plunge in value.

Meanwhile, stocks and bonds have been on the rise, but the U.S. dollar has been flirting with multi-year lows, eroding our purchasing power in an insidious manner. Should inflation rear its head, all the Treasury buyers who have been salivating over 10-year yields between 3 and 4 percent (and bank certificate of deposit yields lower than that) are going to find themselves facing negative real returns.

One worthwhile resource for retirement planning is the Retirement Advisor blog and its electronic newsletter. Editors David and Kirk are offering free samples of the newsletter, which tracks everything from recommended mutual funds to model portfolios to where to find the best interest rates. It's practical, well-written and free of the kind of sales hype and promotion that often accompanies investment advice.

From my perspective, two big issues loom on the investment horizon: navigating the twin threats of deflation and inflation and hedging against further declines in the value of the U.S. dollar. With the political climate more attuned to problems with unemployment than potential inflation, we may see an extended period of monetary ease, sustaining investment challenges in a low-yield, weak dollar environment.
.

Passing the Plate: An Experienced Prop Firm Trader Shares His Setup

This post goes back to a September trade in AIG (see chart above). Credit belongs to Adam, a successful prop trader who I have had the pleasure of knowing for a while now. Adam's firm, T3 Capital, maintains a website that you might want to check out. It features a number of learning services, including a virtual trading floor.

Monday, September 21st offered a great trade in AIG for Adam. Here is his detailed explanation of the trade:

"For the past few months, the market's strength has been obvious. I think the one thing that sets this rally apart from other rallies is the fact that it is not just the market as a whole that has been rallying. On days where the broader market seems to be taking a breather or even pulling in some, there have been stand out "daily plays" on the long side that have been going up a significant percentage every day. I felt that AIG was a fitting stock because it is mainstream and has had a ton of volume since reverse splitting. There had been a tremendous amount of momentum in this name.

When looking for stocks to get involved with intraday, traders must do their homework by first looking at daily charts to see which stocks are "in play", then breaking them down to the relevant time frames which they typically trade. My time frame (along with other traders in our firm) are the 5-minute intraday, 15-minute intraday, and the daily time frame. I tend to use ranges anywhere from 5 days to 3 months to 1 year, just so I can have price points to use as reference for most recent levels to watch for breakouts. I also think it is important for a trader to know a stock's 52-week high.

August 5th was a signficant day for AIG. It put in a tremendous wide-range bar on monster volume. It had almost a 10-dollar range; if a trader didn't capitalize on it this day, it was important to put it on the radar for the following few days or even weeks. This type of day is a sign to an intraday trader that there is money to be made in this stock over the next few weeks. Sure enough, the stock continued to climb higher. Every pullback was small and every rally was strong, with volume on the up days far greater than volume on the down days.

That brings me to my trade. After having a big run into the end of August, AIG came in and settled into a tight range for the month of September. On the prior Monday, it put in a significant green bar with volume. Its range contracted every day of that week, with volume drying up each day. On Friday, September 18th the stock showed a little life, but then came in at the close.

So the first level a trader should look for the stock to break would be 40.80, which was Friday's high. The market gapped down on Monday morning and AIG gapped down as well, but went green within the first five minutes of the day. The stock was displaying relative strength immediately. Once the stock went from red to green, a trader could have made a case to buy it then. But if you are more technical, you could have put a buy stop above 40.80, gotten filled, and within the same five minute bar had a 2 dollar profit.

This trade worked, but I am a bit longer term than that and like to build into a position. Already at this time of day AIG was coming up on my filter with larger than average volume, so I knew this stock was going to be one to watch today. Recently, when AIG has had "special days", the range on the stock has been exceptional, so the fact that it sprinted up so fast in the morning should have been a hint that it could be one of those special days for the stock.

The market proceeded to break lower at 9:55 AM and AIG barely came in. To me, this was an entry point for a few reasons: The market sold off hard, but the stock was showing positive divergence, great relative strength, and big volume for that time of day. It was also holding its breakout level from the last five days, which was 41.30. This was a well-calculated risk/reward entry point. After the selling stopped and the market began to uptick again, AIG rallied from 42 to 45 in three five-minute bars. Again, if you are an active daytrader/scalper, a three dollar move in this short period of time is tremendous. And remember: this was all happening within the first 30 minutes of the open with the market still sitting in the lower end of its range for the morning!

At this point on the daily chart, AIG was now at its highest point for the month of September and was on pace to put in its biggest volume day for the month as well. Traders at our firm wanted to see the stock consolidate its gains and base out for hopefully another move in the afternoon, which is exactly what we got. If you look at 15-minute candlesticks, AIG's range contracted significantly after the big move in the first 45 minutes of the day. Before 1:00 PM, its range started to expand and it began to inch up to the morning highs of 45 again. It consolidated there for about 30 minutes and pushed through to new highs. This was a fresh buy signal for traders in our firm. Thas all happened with the S&P futures not really doing much on the day or even at the time. They weren't near the highs they had made around 11:30 AM, yet AIG had broken out to new highs.

Technically, the stock traded great in the afternoon. A trader could have put a stop in at $45 after it broke higher on the day and would have risked 60 cents to make a few dollars. There was really no reason to get out of this trade in the afternoon, other than to book profits. The stock got a few cents shy of $50 before pulling back, but still finishing great. This also qualified as an overnight position for traders at our firm."

I want to thank Adam for taking the time to detail one of his trades. Note how he integrated a wide array of information in generating and managing the trade, including price levels from recent and longer time frames, volume, and relative strength. Observe also how he waited for the stock to show its strength before making his moves. Hats off for a good trade and--better yet--an inside look at how a pro trades.
.

Indicator Update for October 11th

Last week's indicator review suggested that the summer lows in stocks would likely hold on the market's pullback, with eventual tests of the bull highs to come. That happened in spades, as stocks rose sharply from their lows, making fresh closing lows in the Dow (DIA) and S&P 500 (SPY) averages and taking the sectors back to short-term uptrends.

Interestingly, we're seeing progressively weaker upside momentum on market moves higher, as illustrated in the Cumulative Demand/Supply Index (top chart). A similar pattern can be seen in other momentum measures, such as the McClellan Oscillator. Even more concerning, we're seeing a number of divergences in the making as we register closing price highs for the bull market. This is nicely illustrated by the number of stocks across the NYSE, NASDAQ, and ASE that are making fresh 20-day highs minus lows (middle chart). Thus far, that number is significantly lagging behind its mid-September levels.

Note also the pullback in the bond market (bottom chart, kudos to Barchart.com). To this point, stock market strength has been accompanied by bond market strength--a change from the bear market dynamic, which saw rising bond prices as a safe haven from falling stocks. Most recently bonds and stocks have risen together on the prospect of continued central bank ease. The latest pullback in bonds may be nothing more than a brief pause in a march toward sub-3% on the 10-year note, but it's on my radar as a possible stumbling block for stocks. Should the market become more concerned about inflation and a Fed "exit plan", that could lead to selling in shares as well as bonds.

To this point, I continue to view the market as having made a momentum peak in mid-September, with further price peaks to follow. If that is the case, we could see further upside in stocks, but we should also see continued divergences among indicators, sectors, and indexes prior to any protracted correction.

I will be updating market indicators each morning before the market open via Twitter. You can follow the Twitter posts by tracking the last five entries on the blog page under "Twitter Trader", or you can subscribe to the Twitter feed via RSS free of charge by going to my Twitter page. Please note that I will be updating both daily and weekly price targets for SPY via Twitter, as well as the usual measures of trend status, momentum, and strength.
.

Weekend Reading: Markets and More - Volume Two

* FDIC facing growing failures among small banks;

* Three reasons for not pursuing trading as a living;

* Does restricting calories improve health?

* Sobering view on the pension crisis;

* Credit contraction and other topics for important reading;

* But for leverage, Amaranth's strategy was a winner;

* Size matters: ETFs can change markets;

* Thanks to a sharp reader for this link to an article on cocaine addiction in the financial industry;

* Behind the economic collapse was fraud;

* Getting beyond quackery in the coverage of economic data and markets;

* Diversifying beyond the U.S. dollar;

* Thoughts on political power and the financial system.
.

Sector Update for October 10th

Last week's sector review noted that we had seen a likely momentum high in the market and could expect further tests of the bull market price highs. That happened quicker than I expected, as we bounced sharply off last week's lows. That turned our Technical Strength measure, a proprietary index of short-term trending, solidly positive across the eight S&P 500 sectors that I follow weekly (see chart above).

Here are the sector readings as of Friday's close:

MATERIALS: 300
INDUSTRIAL: 260
CONSUMER DISCRETIONARY: 200
CONSUMER STAPLES: 340
ENERGY: 380
HEALTH CARE: 320
FINANCIAL: 340
TECHNOLOGY: 280

All the sectors are in clear uptrends. The turnaround from last week was particularly notable among the Materials and Energy sectors, reflecting strength in commodities. Health care stocks also made a significant trend reversal.

Despite the impressive market strength, none of the sectors is as yet hitting multiweek highs in Technical Strength. We're also seeing potentially troubling divergences among both stock sectors and indexes, as not all registered fresh price highs alongside the Dow and S&P 500 averages. I will be tracking momentum and the trend status of my basket of 40 stocks each morning before the open via Twitter (follow the tweets here).

To this point, I continue to view the market action as part of a topping process following a momentum price high in mid-September. That does not preclude further price strength, but does suggest that the upside may be limited here.
.

Divergences on the Radar

We registered a new bull market closing highs for the Dow Jones Industrial Average (DIA; above) and S&P 500 Index (SPY) on Friday. Falling short of their bull highs thus far are the NASDAQ 100 and Russell 2000 averages, as well as the XLB, XLI, XLV, XLF, and XLU sectors. We made 1305 20-day highs on Thursday across the NYSE, NASDAQ, and ASE and 970 on Friday. That compares with over 3000 fresh 20-day highs in mid-September.

This past week's rally may broaden out in coming days; thus far, however, it's worth noting that the rally has been inconsistent: pushing up large caps in the U.S. and emerging market stocks (EEM), while much of the rest of the world (EFA)--particularly Japan (EWJ) and the U.K. (EWU)--and smaller cap issues in the U.S. have lagged.
.

Chasing Yield, Not Risk

Low interest rates are pushing individual and professional investors into higher-risk assets in the search for yield. This has been happening for a while, as mutual fund inflows into municipal bond funds have topped 1 billion dollars for 11 consecutive weeks. This has pushed yields down over the past six months (chart above; props to Bloomberg).

Interestingly, investors can only be pushed so far along the risk continuum: as mutual fund assets for bond funds have increased, those for stocks have declined--even as the stock market has risen. That is hardly the psychology of a bubble in the making.

It's only after investors shun fixed income and pursue a bull market in stocks that I suspect we'll be ready to set up for a fresh bear. That might not happen until the Fed is in the mode of raising rates, which in turn might not happen until inflation replaces unemployment as the dominant headline. If that's the case, the bull could have further to run.
.

Weekend Reading: Markets and More - Volume One

* Very important issue: When will the Fed begin its exit from monetary ease?

* Thanks to a sharp reader for this article on the costs of a weak dollar policy;

* A look at gold volatility and many more worthwhile perspectives;

* Killing the economic goose with debt;

* Changing geopolitics of natural gas;

* Europe as the loser in the financial crisis?

* Ten best dividend stocks;

* Thoughts on FHA as a sub-prime lender;

* Russia's stock market on the rise;

* Looking under the hood of bond ETFs;

* ETFs that can benefit from U.S. push into emerging markets;

* Rundown of financial news;

* The high cost of high school dropout.
.

Changes in Tracking the Behavior of Large Traders

Thanks to an alert reader for passing along this note from Market Delta regarding changes in how the CME is reporting volume data. By unbundling trades and reporting multiple, smaller transactions where only one large trade was formerly reported, the exchange has made it more difficult to track the activity of large traders.

I'll be looking into this in the near future. Depending upon the unbundling scheme, it may be possible to still monitor large traders simply by lowering the threshhold for what qualifies as a large trade. If the trades are unbundled into one and two lots, of course, this would be impossible. In that event, it would be necessary to aggregate the trade data over short time periods to infer the presence and activity of large participants.

More to come.
.

Quick Look at a Range Market

Note how we are trading within yesterday's range in the ES futures (top chart), with the NYSE TICK relatively evenly distributed around the blue zero line (bottom chart). We can see the diminished volume in the ES futures, a nice tell that market movement is diminishing as the Columbus Day weekend approaches.
.

When Trading for a Living Becomes Living for Trading

I've written in the past of addictive behavior patterns in trading (see this post and its links). One need not be a full-blown trading junkie, however, to reach the point at which trading takes over life rather than adds to it.

It is one thing to have "a passion for trading"; quite another to neglect important spheres of life in pursuit of market success. I can think of many personal passions, from writing to my family relationships, that don't prevent me from fully engaging in other activities at work and in my personal life. Similarly, I know many very dedicated traders who are also immersed in other work, family, and spiritual spheres.

The sad truth is that living for trading generally interferes with trading for a living. By making performance paramount--and allowing performance concerns to dictate one's mood and time expenditures--traders inevitably find that trading is controlling them, not the reverse.

A few self-assessment questions may prove helpful:

Are your trading activities contributing to a lack of fulfillment in your physical and emotional development? In your relationships? In your daily moods and energy level?

How much time are you spending truly preparing for trading vs. worrying about it?

Is trading generating well-being for you or eroding it?

Is trading taking needed time away from the people you love and care about?

People who spend huge amounts of time consumed with an activity may romanticize their monomania, but most of the time I find that they are simply inefficient: what they objectively accomplish is no greater than what others achieve with positive mood and attitude in fewer hours.

Trading for a living can bring a high degree of personal autonomy and freedom. That is exciting. Living for trading is the antithesis of freedom and autonomy: you can't be a free agent if you're a slave to the screen.
.

Overcoming Mood Problems in Trading

A reader recently commented on the post that described three life problems that can become trading obstacles. The reader described intense anxiety experiences even when trading in simulation mode. To the reader's credit, he is wanting to resolve this problem before putting his capital at risk.

If the anxiety problem is one that also interferes with other spheres of life and/or does not respond to the kinds of self-help interventions described in my book, the answer is to get professional help for anxiety. Cognitive-behavioral therapy is quite effective in the research literature and would be my preference for treatment of first choice. One referral list of trained professionals can be found here.

In particularly debilitating circumstances, including those that do not respond to talk therapy, medication can be effective and consultation with an experienced, board-certified psychiatrist can be useful. Sometimes medications can get the problem under control sufficiently that the person can then begin the cognitive behavioral work to learn skills and master the anxiety.

One area to explore with a trained professional in cognitive-behavioral work is one's expectations going into trading. Many times, expectations are so high and the need for success so great that traders place undue performance pressure on themselves. (See this post and its links for more on performance anxiety). If trading success is equated with one's personal worth and success, the pressures of taking losses will be greatly magnified.

Where cognitive techniques are effective is in reframing these expectations and needs so that traders can more readily divorce their self-esteem (and their feelings about their future) from the outcomes of specific trades. Very often, traders are less afraid of losing trades than losing trading. Their anxiety stems from seeing normal losses as threats, not opportunities for learning and development.
.

Quick Look at TIPS and Beyond

On the radar: U.S. Treasury Inflation-Protected Securities (TIP; above) are making multi-month highs, amidst the weak dollar and strong gold. I've noticed a tick up in inflation talk among traders as well. With unemployment--not inflation--making the headlines, the Fed hardly has the political cover to begin serious talk of rate increases. With the Reserve Bank of Australia hiking rates, however, there are concerns that we are just a bit closer to the long-awaited exit from monetary ease. Meanwhile, higher Aussie rates only fuel the carry trade that has traders selling U.S. dollars and finding higher yielding alternatives elsewhere.
.

More Advice Regarding Prop Trading Scams

They seem to be coming out of the woodwork: So-called proprietary (prop) trading firms that charge steep fees for training/education and then allocate X thousands of dollars in "buying power" to traders who pay commissions and other fees. The amount of capital actually allocated is a small percentage of the buying power, and it is a modest percentage of the tuition charged for training. Once commissions and fees (and/or losses) eat up the small capital base, the trader's prop career is finished and the prop firm (which never intended to make money from the traders' trading) pockets the fees.

Use due diligence and common sense when such firms show a ready willingness to make you "an offer." Whatever this model is, it is *not* proprietary trading as practiced by respected firms. If a firm offers solid education for a fee, that may be a wise investment. But don't let (thin) promises of prop trading talk you into tuition payments you wouldn't be making otherwise.

For more on this topic, check out this post on Prop Firms, Arcades, and Scams

.

Interesting New Tool for Pairs Trading

I see that Henry Carstens has added a dashboard to his "Forecasts" page that includes his latest tools derived from his trading systems. One new tool features stocks for pairs trading, where each of the stocks is taken from a high-volume universe. (Above was taken from yesterday's market). Stocks in green have high odds of uptrending; those in red have high odds of downtrending. By buying a green stock and selling a red one (equal dollar amounts for stocks with similar betas, or volatility), a trader reduces the impact of overall market movement and instead trades the relative strength between the two issues.

Alternatively, the green and red stocks could provide screening candidates for long and short trades that fit your own setup criteria. Thus, if you're noticing developing market weakness and see a red stock unable to take out an important price level or fill an opening downside gap, that might be one you would choose to sell.

The tools on the dashboard are updated every five minutes and provide an overview of market, sector, and individual stock strength and directionality. Sweet!
.

Worthwhile Midweek Reading

* Trading reversals from a gap fill and other excellent posts from Kirk; see also the links from The Kirk Report's twitter page;

* Diagnosing why your trading isn't working out;

* A bullish ETF look at Brazil;

* Using longer-term price levels to guide intraday trading;

* There's more to the market than the economy;

* Thanks to a perceptive reader for this link re: making change efforts simple;

* Market wisdom delivered via the ABCs;

* More on transcending the need to be right;

* Consumer confidence on the decline;
.

Three Life Problems That Can Become Trading Problems

In my work with traders, I've found that life problems that spill over into trading mostly fall within three groups:

1) Mood Problems - This is where problems with anger, anxiety, depression, and other mood states interfere with aspects of life outside of trading, but also sometimes get in the way of trading decisions. Simply tweaking one's trading will not address the underlying problem if this is the case; profits in markets cannot be counted upon to compensate for negative feelings--or negative feelings about oneself. Often, professional help can be quite useful, particularly if self-help efforts fall short.

2) Problems With Addictive Behaviors - Here is where difficulties with gambling, drinking, and drug use can also manifest themselves in trading. A number of people with addictive problems also have mood problems and, in some cases, the addictive behaviors are an attempt to cope with disruptive moods. Similarly, traders can put on positions more to regulate their emotional states than to objectively capture supply and demand in the marketplace. This is another area where professional help can be essential.

3) Problems With Attention Span and Impulse Control - Sometimes people are prone to distractions across a variety of situations. That makes it difficult to plan actions and follow intentions. This can show up as getting behind in chores at home, being disorganized with time and responsibilities at work, and as impulsivity in decision making. Many traders who have trouble sticking to rules and plans experience similar lapses elsewhere in life. Biofeedback and medication help can be helpful when the problems reach levels where self-help efforts at time management and organization fall short.

In these situations, it makes sense for traders to not assume that reading books and chatting with coaches will solve their problems. Sometimes problems have biological and psychological roots that require more directed intervention. If self-help has failed, it may be because other forms of help are needed. I encourage traders to evaluate themselves as objectively as possible; great things are possible once you're freed up to simply trade markets as you see and understand them!
.

Maintaining a Healthy Relationship With Markets

My recent post on being right versus being profitable highlights a problem that affects many active traders: they are acting out conflicts or problems from their past in their present trading.

The need to be right reflects concerns about self-esteem and the need to prove and validate oneself. This is not a market issue, and it's most likely an issue that affects other areas of life, from work to relationships. If one, for example, spends a great deal of time arguing in relationships over who is right and who is wrong, it wouldn't be surprising for them to fight markets.

In a good relationship, there's no right or wrong: my role is to do everything I can to ensure the happiness and fulfillment of those I love. If they love me and take the same approach, we'll all be better off. If I inadvertently hurt the feelings of my son or daughter, I don't argue with them that they're too sensitive or misunderstood me. I apologize and try to understand the situation better.

In a good relationship, it's more important to preserve trust, harmony, respect, and love than to validate oneself. Interestingly, when there is such an environment, that is the most validating of all!

It is similar with markets: in our relationship with them, we want to be active listeners. Our egos may feel a need to impose our views, our agendas on markets, but if we're truly listening to markets and in harmony with them, we will find the right actions. And that produces a validation in profits beyond any occasional calling of market tops and bottoms.
.

Habitual Contrarian Traders: Being Right vs. Being Profitable

Certain traders I've observed seem to be habitual contrarians. If the market is screaming higher and looking like a trend day to the upside, they're looking for places to sell. If the market is slow and rangebound, they're hunting for the next breakout move.

Instead of identifying what the market *is* doing and following that, habitual contrarians try to anticipate the *next* move. Interestingly, that next move is generally something different than the market is presently doing.

Habitual contrarians are trading a need to be right: a need to make big market calls. They are engaging in trading to feed their ego, not build their account statements. It isn't enough to go for the high probability trade; they want to call the turn or break.

Many, many good trades are decidedly unsexy. They involve buying pullbacks in an uptrend or fading low volume moves to a range extreme. Successful traders subordinate ego; in their dance with markets, they don't need to lead.

Theirs is a situation in which unmet needs from outside of trading conspire to sabtotage trading. I will be writing more about this shortly.

More on The Need to be Right

.

Powerful Intermarket Theme

Here we see the powerful theme driving the recent markets: the U.S. dollar has been weak, particularly vs. the Australian dollar (top chart). That has led to strength in such commodities as gold and oil and a sharp rise in stock prices (ES futures; bottom chart). As long as portfolio managers remain bullish on risk assets and need to finish their years strong, they will continue to bid up stocks and commodities and sell the U.S. dollar in favor of higher yielding currencies.
.

Passing the Plate: The Value of Trading Tools

In this latest "passing the plate" post (click on the above display), you'll see two new indicators that Henry Carstens has been working on and displaying on his site. These indicators are based on the same logic that drive some of the systems that Henry uses in his money management. The above charts were taken from Monday morning's market.

At left, Henry is tracking the odds of a trend day in each of nine S&P 500 sectors. From left to right, those are XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, and XLY. Note how the sectors look mixed (though generally positive); that led me to not chase market strength, recognizing that we might not be closing near our highs for the day.

At right, we see that Henry is tracking a large basket of liquid stocks and evaluating each one for its trend status. By summing across the basket, he is able to get a good reading for the overall market. The indicator updates every five minutes, providing a useful measure of whether the market is strengthening or weakening. When indexes were at highs around 10 AM CT, I saw that the cumulative status of the indicator was having trouble sustaining its highs and (wisely it turned out) waited for a pullback before engaging the market on the long side.

In trading, as in carpentry and auto mechanics, the expert craftsman looks for the right tools--and the best tools--for the job. Some of the best tools for traders allow them to see the market's big picture, even as they stay focused on short-term patterns and sound trade execution.
.

Reflections on Freedom and Commitment

I want to thank a perceptive reader for passing along this insightful post regarding freedom, choice, commitment, and restlessness. It is well worth reading both as a life lesson and as an insight into trading problems.

The key idea is that we can only maximize our freedom through commitment. While it may seem that unlimited choice offers the greatest opportunities for freedom, that generally is not the case. When supply is unlimited, value is reduced: unlimited choices lower the value of each marginal selection. To maximize choices, we should probably always eat at buffet and salad bar restaurants. That, however, would not necessarily maximize our dining pleasure: a more limited, gourmet selection is likely to prove more satisfying.

Similarly, we could have a different bedroom partner every night, but would that maximize either freedom or well-being? A slave to passions, like the glutton at the buffet, is hardly free. A long-term romantic relationship offers a depth and breadth of experience that can only be found in the context of commitment.

I believe the same principle applies to trading. At some point, we have to commit ourselves to the trade and gain the profits and confidence that result from a market move that reaches its targets. Too often, traders seek the freedom of trading in and out of their ideas, never seeing their positions through. That isn't freedom--most often, it's giving into fear--and it rarely maximizes opportunity.

When I had to submit a picture of myself to my university alumni book, I sent the above photo. It's no mistake: I think of myself as part of a couple, part of a family. In that commitment, I've found greater freedom and fulfillment than I ever knew as a restless single person. It is the same with our trades and plans: when they are working for us, we stick with them and see them through. Promiscuity in trading works about as well as it does in relationships...and for much the same reason.
.

Two Valuable Tells for Stock Market Strength

Two valuable tells for a strong stock market: NYSE TICK stays positive through the day (top chart) and intermarket themes (from Barchart.com; bottom chart) favor commodities and a weak U.S. dollar.

Note how the moving average of NYSE TICK (blue line, top chart) consistently stays above the yellow zero line. That shows persistent buying pressure, as traders act on growth themes (demand for energy) and continue selling the U.S. dollar in favor of higher yielding currencies.
.

A Quick Look at Sector Performance on the Day

In upcoming posts, I'll be continuing to highlight worthwhile trading tools. This quick sector snapshot from FinViz, which I highlighted a while back, shows which sectors are outperforming to the upside (amount of green for each) and which are lagging (amount of black and red). Thus far, we see that financial stocks are doing relatively well, as are basic materials shares (reflecting commodity strength). The more defensive consumer staples and utilities issues are lagging on a relative basis.

Note how we can assess the overall strength/weakness of the market simply by seeing the balance between green and red. Days with a great deal of black show mixed performance and are characteristic of non-trending days. If you look within each sector (click on image above), you'll see which stocks within the groups are outperforming and underperforming: useful information for stock pickers.
.

Passing the Plate: Integrating Time, Price, and Volume

The next in the series of "passing the plate" posts comes from SSK, who maintains a very useful and educational trading site. His analyses draw upon Market Profile theory and keen observation of time, price, and volume to catch shifts in demand and supply.

SSK's explanation, along with his graphics above, will take a little study, but the effort will pay off. If you click on each graphic, you'll be able to read SSK's data and commentary. Here is the explanation of his setup:

"In this trade, after recognizing a potential short near the high of 9/17/2009 in the 1068 area, I was looking for continuation to maximize my trade and was also looking for a transitional state to allow for potential profit-taking. The Profile from 9/16/2009 (top chart) identifies a low or negative volume area (1055-1058) that many times, as price reaches this area, acts as initial support or resistance. That was my reference point. When price reached this area, I went to my NYSE tick chart and looked at its structure. I saw a momentum low in price, and then a few minutes later a lower low in price (this is a transitional pattern), during which the NYSE tick was gaining strength right at the secondary low (middle chart). Additionally, the NYSE Composite volume that I track on my spreadsheet also showed the volume and directional trends weakening as we approached the reference point (bottom chart). All in all, a nice exit on the short trade from the highs in the 1068s for 10 points, and a nice entry on the long side from the 1058s, with an exit near the POC (point of control) near the 1063s for 5 points. The key was to first identify the reference point and then observe the transitional structure via the NYSE tick and NYSE Composite volume."

What is clear from SSK's analysis is that he is not just relying upon market indicators, but rather on configurations of indicators that reveal the developing strength and weakness of markets. In so doing, he is able to capture larger moves and plan out his trade as it emerges. Many thanks to SSK for the illustration; check out his site for more market insights.
.

Passing the Plate: Swing Trading With the Trend

A while back, in my "passing the plate" post, I requested trading ideas from readers. So far, I've passed along ideas regarding overbought and oversold markets and also shared some of my own market indicators, including intraday new highs/lows; volume distributions to identify trending markets; short-term transition patterns; and non-confirmations in NYSE TICK.

This week I will be featuring reader submissions. Here is a post from Lionel, who trades out of Malaysia. He works full time and so trades on a swing time frame, rather than intraday. His rules follow a trend following logic, using pullbacks to enter on the long side. He gauges risk/reward for each trade and trades with defined profit targets. In his post, he illustrates a trade in WMB that followed his rules.

From a psychological vantage point, Lionel is accomplishing several things:

1) He has found a trading style to fit his lifestyle;

2) He has distilled his trading to explicit rules, which helps him maintain discipline;

3) He has focused on exits as well as entries, with an eye toward minimizing losers and maximizing winners.

As traders lengthen their time frame, they have time to research markets and stocks and apply rules to their trading. For some, this makes greatest use of their strengths, while avoiding impulsive trades without an edge. Thanks to Lionel for passing his ideas along.
.

Indicator Update for October 4th

Last week continued the pullback from the momentum highs noted in the previous indicator review. We can see from the Cumulative Demand/Supply Index (top chart), a cumulated measure of upside and downside momentum, that we are at oversold levels. These levels are close to those that have typified intermediate-term bottoms since 2007.

Note that we've broken down in the 20-day new highs/lows (middle chart), with many more stocks registering intermediate-term lows than highs. Indeed, the number of 65-day lows on Friday was greater than any level posted since the July bottom.

Finally, we see from the excellent (bottom) chart from Decision Point, that the advance-decline line specific to the S&P 500 stocks is approaching its lows from July and August. These levels, both in the A/D line and the new highs/lows, should represent meaningful support if the longer-term uptrend is to remain intact. Taking out those summer levels would suggest a more significant, longer-term corrective process.

At this juncture, I expect those summer levels to hold, placing us at the very least in a broad trading range and setting us up for an eventual test of the bull highs. The indicator readings, however, are losing strength--not bottoming out--so I am not in the mode of catching falling knives. Should we see evidence of diminished selling pressure and downside momentum this coming week, I will likely be nibbling at the long side.
.

Mid-Weekend Reading

* Predisposed to stress: Much of an anxious temperament is hard-wired;

* Thanks to an alert reader for these nuggets of fireside chat wisdom;

* A sharp reader notes this study of perceptual bias among chart readers;

* Debt levels in the U.S. are courting instability;

* Stages of a trader's development; nice post;

* Consciousness as Wi-Fi for the brain, which might explain why impairments in consciousness affect decision making so profoundly;

* Should a bank holding company in the U.S. be making investments in China, when no other such company is permitted?

* Excellent weekly summary of economic data;

* No end to the unemployment situation in sight;

* China's grab for natural resources makes oil a buy;

* Investing in Latin America with ETFs;

* Editor's Picks at NewsFlashr: Nice selection of latest blog postings.
.

Sector Update for October 3rd

Last week's sector review noted that "the current pullback should not be the start of a bear swing, but should be sufficient to inflict technical damage on what has been a very strong market since July." That technical damage was evident during the past week, as most of the eight S&P 500 sectors that I track fell into downtrend modes in the proprietary Technical Strength measure. We can see the broad turnaround since the week of 9/11: all sectors are either trading in downtrends or in neutral trending mode. Last week's weakness was particularly evident among the economically sensitive materials, industrial, and technology shares. Amid concerns regarding reform, health care stocks were also notably weak.

Here is how the sectors lined up as of Friday's close. Note that Technical Strength varies from +500 (strong uptrend) to -500 (strong downtrend), with scores between -100 and +100 signifying no major directional tendency.

MATERIALS: -240
INDUSTRIAL: -220
CONSUMER DISCRETIONARY: -80
CONSUMER STAPLES: -60
ENERGY: -160
HEALTH CARE: -280
FINANCIAL: -180
TECHNOLOGY: -240

Only the Technical Strength from the second week of July was weaker than the present readings, going back to the market lows in March. I continue to view the recent highs as a momentum peak in the market and expect the current intermediate-term correction to lead to tests of the bull highs. At present, however, the market is losing strength week over week, so it makes sense to wait for evidence of bottoming before playing for the next bull swing.
.

A Solution-Focused Approach to Overcoming Trading Frustration

My first post in this series explained why frustration is perhaps the most destructive force affecting active traders. The second post outlined cognitive strategies for preventing and overcoming trading frustration. This final post will explain a solution-focused approach for dealing with the frustrations that can generate overtrading, missed opportunities, and impulsive decision-making.

Whereas cognitive techniques for dealing with trading problems focus on changing negative patterns of thinking about ourselves and markets, solution-focused approaches start from the premise that--at times--we are already enacting the positive patterns ("solutions") that we desire. Instead of focusing on what we're doing wrong and trying to prevent ourselves from doing it (which only keeps us problem-focused), we instead craft solution patterns out of our best trading.

There was a period in which I found myself trading too much and losing money needlessly. I recognized that I was in a frustrated state when I was putting the trades on. In the back of my mind, I sensed that they were poor trades from their inception.

I also recognized that there were times in which I traded in a very harmonious state of mind. I had clarity about what I was doing and it felt as though the market was coming to me. I wasn't trying to make things happen.

From the solution-focused vantage point, I began to dissect those harmonious periods. The idea was that, if I could figure out what I was doing right at those times, I could turn those "best practices" into routines--and ultimately into habit patterns.

One of the clearest conclusions that emerged from this analysis was that, during my harmonious trading, I had an explicit "top-down" perspective on the markets. I focused clearly on what was happening at larger time frames and aligned myself with the market's broader structure (trending/non-trending) and themes. During my frustrated trading, I worked from "bottoms-up", looking for short-term setups regardless of the market's broader picture.

Little wonder that I would get run over on those bottoms-up trades, catching the next ticks, but missing the next points. My frustration stemmed, not just from my losses, but also from my feelings about what I was doing. At some level, I was frustrated with myself for not trading the way I know how to trade. In short-circuiting my decision-making process, I felt that I was losing a part of myself, my integrity.

From the solution-focused frame, I found music that--for me--captured a bit of the harmonious feeling that I experienced when I traded well, with integrity. Before I started trading, I engaged in my market preparation, listened to the music, and established a clear, written large-picture view of the market. That became as much a part of my morning routine as washing up, making my coffee, and doing my stretching exercises.

The solution part was shifting myself to the harmonious frame of mind, while reminding myself of integrity. I didn't try to analyze or fight frustration; rather, I became better at sustaining a mode in which frustration could not flourish.

As I stressed in a recent post, at times we are already the traders we desire to be. Solution-focused methods are structured techniques for more consistently accessing the person we already are at our best.

For those interested in a detailed presentation of solution-focused methods, my chapter in the training text The Art and Science of Brief Psychotherapies is a good overview. Trading perspectives devoted to the solution-focused perspective can also be found in this post and its links, as well as Chapter Four of The Daily Trading Coach.
.

Readings and Ideas To Start An October Weekend

Only those who have achieved a significant measure of personal freedom can truly benefit from free markets. If we are slaves to our impulses, habitual thoughts, and emotions, how can we make free choices? Greatness springs from the ability to sustain directed effort.

In training ourselves to trade markets, we inevitably train the will.

Failure is an essential component of achieving success.

Practice doesn't make perfect; it takes perfect practice to generate mastery.

So much of the difference between good and bad trading boils down to intentionality.

Trading success comes from developing a system for losing money.
.

Evaluating the Market Before the Open

7:49 AM CT - I added the top chart to illustrate the shift in distribution after the employment data. We're building volume now around ES 1016 (side histogram), with price holding well below the day's volume-weighted average price (red line) and volume transacted at the bid well exceeding that at the offer (bottom histogram).

Here's how the ES futures are setting up going into the employment numbers. Will the economic release be a game changer or keep us in our range? I like to track the market before and after the numbers, with an eye toward any possible change in the distribution of buying and selling. Note that we've been accumulating volume between 1024 and 1025 thus far in premarket trade. I'll update via Twitter early this morning.
.

A Cognitive Strategy for Overcoming Frustration in Trading

My recent post emphasized the importance of overcoming frustration in trading. In this post, we'll take a look at a cognitive approach to dealing with frustration and its effects on trading.

Cognitive theory suggests that we do not respond to events themselves, but rather to our thinking about those events. If I get a "C" on a test after not having time to study, I might feel very good, knowing that I passed. A different person taking the same test might feel depressed with the same grade, crushed that they did not finish at the top of the class. How we process the event affects how we respond to it.

Similarly, when traders are overcome with frustration, cognitive theory suggests that it is not their losses, but their thinking about their losses that generates their stubbornness, self-criticism, and overtrading.

Specifically, traders need to process losses as self-esteem events if they are going to generate strong emotional responses. (Note: lost opportunity can be as threatening for a trader as realized losses). The frustrated trader, at some level, feels that losing is a sign of weakness or incompetence: that taking a loss makes one a loser.

It is the desire to avoid feeling like a loser that typically gets the frustrated trader holding onto losing positions and overtrading to make money back. Ironically, those very reactions make it more likely that the trader will experience catastrophic financial losses.

A cognitive approach to overcoming frustration would be to rehearse ways of thinking that make losses non-threatening. This is why, in the coaching book, I stress the idea of actively embracing losses and learning from them. When we take a loss, it means that either we did not execute our idea well or that our idea was wrong. Either can be an opportunity to learn.

If our self-esteem comes from learning, growing, and developing--not from being perfect or being the best--then we do not need to fear our shortcomings. They fuel efforts at self-improvement.

A daily program to transform yesterday's losses into today's goals achieves an important psychological alchemy: we take what has been threatening and frustrating and turn it into a potential source of pride.
.

Making the Trend Identification With Intraday Sentiment

Note how the moving average of the NYSE TICK (blue line; top chart) has stayed below the zero level (orange line) for most of the morning. Similarly, we've seen much more volume in the ES contract hitting bids vs. lifting offers (bottom histogram; bottom chart). When we get directional signals from both indicators, that's when we're most likely to see trending trade.

I see Henry Carstens has consolidated his trend identification tools; excellent decision support.
.

Changing the Posting Schedule: A Note for Readers

As you can see, the frequency of posting to this blog has expanded greatly in recent months, running about three times the level from early in the year. Most of that is due to intraday posts regarding the markets, highlighting trading patterns and tools. Over time, I'll be collating those posts and organizing them into a trading primer for developing traders.

Now it's time for me to put aside the 4 AM to 8 PM daily schedule and focus on the firms that make use of my coaching services, as everyone is gunning for a positive finish to 2009. I'll continue to post on trading and market psychology, but there will be fewer "real time" posts and tweets.

And, yes, I will catch up on email (inbox reads 1905 at present) and those "passing the plate" resource posts from readers. Whew!

Thanks as always for the interest and support--

Brett
.